- Issue Brief
- Amanda (Yue) Jin, Yilun Zhang
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Image Credit: China in red, transport corridors in blue and black and in orange, members of the AIIB (Asian Infrastructure Investment Bank) (Credits to WIKIPEDIA, 2017)
Resident Senior Fellow
On April 9, the 21st edition of the China-European Union annual summit was held in Brussels. China and the EU share a comprehensive and multi-dimensional relationship that ranges from supporting multilateralism to climate change to fostering mutual economic interdependence. The EU’s current strategy is firmly grounded in a concerted effort to constructively engage Beijing.
China’s relations with the EU, and individual EU member states, has been subject to successes and stress of late. In late-March, Italy became the first G7 country to sign up to the Belt and Road Initiative; days earlier, the European Commission and the EU High Representative for Foreign and Security Policy alluded to China as a “systemic rival” in the course of a strategic stocktaking exercise.
China and the EU share a reciprocal, non-discriminatory and open trading relationship. The same cannot be said however of China-EU investment ties. Chinese firms can – and have – acquired advanced manufacturing firms or technologies in Europe. By contrast, EU firms are locked out from acquiring equivalent companies in China’s investment marketplace, and often-times feel that they must share their intellectual property with Chinese counterparts as a de facto condition to even operate in the country.
To level this non-reciprocal and imbalanced investment relationship, the EU aims to conclude bilateral negotiations on a Comprehensive Agreement on Investment by 2020 that qualitatively enhances market access and secures fair and equal treatment for EU companies operating in China. In parallel, the EU is in the process of establishing bloc-wide investment screening principles that could detect risks to security and public order posed by Chinese (and other third country) foreign investment in critical assets, technologies and infrastructure.
China’s opening-up and reform of its Foreign Investment Catalogue as well as the passage of a refreshingly reformist Foreign Investment Law (with implementing regulations to follow) should go a substantial distance to allaying the EU’s misgivings and grievances. The fair, non-discriminatory and inter-dependent trade and investment relationship that Brussels seeks will be reciprocated by Beijing to the mutual benefit of both parties.
China and the European Union established formal diplomatic ties in 1975 and, over the years, have come to enjoy a wide-ranging official relationship that encompasses an annual summit, regular ministerial meetings, and over 60 sectoral dialogues. On April 9th, the 21st edition of the annual summit was held in Brussels, featuring a high-level Chinese delegation led by Premier Li Keqiang. At the annual summit, the two sides resolved to conclude an ambitious, high-standards Comprehensive Agreement on Investment by 2020 as well as signed the terms of reference of a China-EU Competition Policy Dialogue that will formulate industrial subsidies and state aid control-related disciplines, and thereby foster fair competition for all players in the EU and Chinese marketplaces.
The China-EU summit follows in the wake of a successful swing through Italy, Monaco and France by President Xi Jinping in late-March. The highlight of President Xi’s trip was the signing of a landmark Memorandum of Understanding (MoU) with the government of Italy on the Belt and Road Initiative (BRI), and a joint meeting at the Elysee Palace featuring French President Emmanuel Macron, German Chancellor Angela Merkel and EU Commission President Jean-Claude Juncker. Ironically, the very success of the signing of the MoU in Rome – the first by a G7 nation with China, spawned anxieties about China’s intentions and purposes in Europe. And the assembled gathering of the key European leaders at the Elysee Palace in Paris a few days later was intended to convey the impression that Europe stood united, arm-in-arm, in its dealings with China – even as it sought a rules-based and forward-looking economic and political partnership with Beijing.
High-level China-European Union interactions date back to the early-2000s. In 2003, the two sides launched a ‘comprehensive strategic partnership’ and China-EU relations today are framed within the ambit of this Partnership, as well as the EU-China 2020 Strategic Agenda for Cooperation. In July 2016, the European Union adopted a new Strategy on China, the key highlights of which were:
On 12 March 2019, within the context of this July 2016 Strategy on China, the European Commission and the EU High Representative for Foreign and Security Policy conducted a strategic stocktaking of the EU-China relationship. The stocktaking exercise, and the ensuing 10-point action agenda enumerated thereafter, was occasioned by a growing perception in Europe that the balance of opportunities and challenges in its relations with China had evolved. And that against this backdrop of China’s rapidly-growing economic power and dynamic political influence, a new realism needed to be injected into EU-China ties – one that was more assertive in demanding that China, both, live up to its responsibilities as a newly-minted global power as well as endow greater fairness and reciprocity in its trade and investment dealings with the EU.
The key media soundbite to derive from the strategic stocktake was that henceforth China should, in the EU’s view, be treated as a “systemic rival.” President Macron appeared to give resonance to this soundbite when he hailed the stocktake as a new “European awakening” to the threat of a rising and assertive China. This characterization of the document’s contents is not entirely accurate. As per the strategic stocktake, engagement continues to remain the cornerstone of the EU’s strategy on China. And while China is indeed a “systemic rival [that] promot[es] alternative models of governance,” there are wider – and multiple – dimensions to the EU’s ties with China. In the Commission and High Representative’s own words:
China is simultaneously a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner, with whom the EU needs to find a balance of interests, an economic competitor in pursuit of technological leadership, and a systemic rival promoting alternative models of governance.
Viewed in broader perspective, China’s promotion of schemes like BRI as well as institutions like the Asian Infrastructure Investment Bank (AIIB) are seen as rival models of governance. A certain realism of the challenge at hand is merited on Europe’s part, in the EU’s view. That said, this aspect of China’s conduct is but one dimension of the EU’s multi-faceted strategic partnership with Beijing – a partnership that is firmly situated within the four corners of a concerted strategy of constructive engagement of China.
China and the European Union are two of the three largest actors in the global economy and share a deep and inter-dependent trading relationship. In 2017, the EU was China’s largest trading partner with a share of 13 percent of imports of goods in China (EUR 217 billion) and a share of 16 percent of goods from China (EUR 332 billion). The China-EU trading relationship is reciprocal, non-discriminatory and open.
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The same cannot be said however of China-EU investment ties. China is – or was, at least, until recently – a significantly growing player in the EU investment market place. In 2016, a record EUR 37 billion of Chinese investment flowed into the EU, mostly in the shape of mergers and acquisitions (M&A) activity, intended to acquire specialized, advanced manufacturing firms or technologies in European innovation-related sectors, among others. By contrast, EU firms were unable to even maintain full-owned investments in a number of sectors in the Chinese marketplace – let alone acquire specialized, technology-rich Chinese firms. To the contrary, EU firms had to submit to onerous requirements as a pre-condition for access to the Chinese market, including creating joint ventures with local companies or have to de facto transfer key technologies to their Chinese counterparts. In instances, they were even forced to license their technologies on (non-market) terms that are inconsistent with China’s World Trade Organization (WTO) accession obligations. A case in this regard is filed and pending at the dispute settlement body of the WTO.
Adding alarm to European consternation were two features of China’s outbound investments in the EU: first, its rapid rise from almost negligible amounts during the first decade of this century and, second, the form and nature of these investments in the EU in the period since. As late as 2009, the combined value of China’s annual investments in the EU was negligible. By the mid-2010s, this outbound investment landscape had changed dramatically. In 2016, as much as EUR 37 billion of Chinese investment flowed into the EU, a multi-fold increase from just five years earlier (it has since fallen back to EUR 17.3 billion in 2018). More problematically, the vast majority of these investments were in the form of acquisitions rather than the preferred greenfield investments – a reversal of trends from a decade earlier. The most prominent among these was the acquisition of German robotics maker Kuka by the Chinese electrical appliance manufacturer, Medea. Kuka’s design-production and robotics systems division host world-leading technologies. This, in turn, fed the impression that Chinese state-linked companies were buying-out Europe’s ‘crown jewels’ in advanced manufacturing sector, which could have lasting effects on technological leadership and national security. China’s Made in 2025 Notice, which indicatively seeks to achieve 70 percent self-sufficiency in core components and critical materials in ten strategically advanced manufacturing sectors by 2025, only exacerbated these suspicions.
It is this sense of alarm stemming from the un-level, non-reciprocal and imbalanced China-Europe investment relationship that the EU’s Strategic Stocktaking of March 2019 is, in part, intended to remedy. Two key tools are foreseen by the EU in this regard:
On 19 March 2019, pursuant to this second tool, the EU issued a regulation that establishes a framework to screen foreign direct investment into the Union. Investments that are likely to affect security or public order are to be subjected to enhanced scrutiny. While the final decision in relation to any foreign direct investment undergoing scrutiny remains the sole responsibility of the relevant EU member state, the European Commission – bearing the EU’s broader security and public order interests in mind – is also statutorily tasked with providing considered input and opinion to the member state on the applicable investment. Factors to be taken into account at the time of screening the inbound investment for security or public order risk are its potential effects on the integrity of:
On the lines of the EU-wide regime to screen inward investments from state-linked economic actors, such as China, a common EU approach to address the security of 5G telecommunications networks is also in the works. On March 26th, the European Commission set the ball rolling in regard to developing a minimum common set of requirements to ensure a high level of cybersecurity of 5G networks across the Union. A toolbox of appropriate, effective and proportionate risk management measures to mitigate identified cybersecurity risks of 5G networks at the national and EU-wide level is expected to be finalized by mid-2020 – perhaps even earlier.
For the most part, the EU’s demands on the core issues at stake in the U.S.-China negotiation (coerced technology transfers; non-market intellectual property rights (IPR) licensing terms and unsatisfactory enforcement, currency valuation; excess industrial subsidies) are just as stiff, or identical to, as those of the U.S.
Where the EU parts company with the US on China is the means envisaged to pursue these demands. While punitive legal measures are not forsaken by Brussels, such as recourse to the World Trade organization’s (WTO) dispute settlement mechanism to remedy China’s IPR licensing and enforcement shortcomings, the recourse to punitive unilateral measures (as is the case with the tariffs imposed by the U.S.) is not foreseen. Rather, the EU’s strategy is to piggy-back on the momentum for action generated by the Trump Administration’s pressure on Beijing and engage and press China to make these market-leveling and market-opening reforms. The trade, investment and IPR reform-related demands are framed by Brussels as stepping stones to a more engaged and interdependent EU-China relationship – one that the EU wishes to pursue with China but which will not be realized if China fails to endow fairness and reciprocity in its commercial dealings with the EU.
A second dimension in the EU’s approach vis-à-vis China relates to the latter’s ingress within the EU’s immediate and extended neighborhood, most notably through its Belt and Road Initiative (BRI). Within this geographic space, the EU’s demands are more extensive than the U.S.’ and include adherence to European community-style undertakings on labor standards, environmental protections, transparency-related considerations, and state-aid and procurement-related disciplines. Again, the objective here is not to deny China’s economic and infrastructural contributions to individual EU countries as well as to countries on the EU’s periphery as much as to bring these contributions, and the practices that underlie them, closer to EU best practices.
For the most part, this challenge from the EU will have a positive impact on the China-US negotiations and trade deal. It is important that on the core grievances at issue – coerced technology transfers; non-market IPR licensing terms and spotty enforcement; competition-distorting industrial subsidies; etc., that there be no daylight between the EU’s and the US’ positions. That has indeed been the case, both, within the bilateral EU-China channel and via the trilateral US-EU-Japan mechanism, which has held five rounds of discussions on these aforementioned issues in order to devise new plurilateral disciplines that could rein-in market-distorting behavior by state-heavy economies. This jointness of purpose has not gone unnoticed in Beijing. It has concentrated minds there to follow through scrupulously on a new round of long-promised but undelivered reform pledges – lest it face relative isolation from the marketplaces, particularly the technology sectors, of its primary trading partners.
On the other hand, it is also helpful that the EU’s approach to China, in contrast to the US’ approach, is not framed in an adversarial tone or context. The promise of a more symbiotic economic EU-China relationship that is being dangled by Brussels to Beijing has the virtue of keeping the U.S. ‘honest’, too, in its negotiations with China. With the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Japan FTA entering into force, the U.S. can ill-afford to face non-preferential access terms in another large market, such as China’s. If China is ready and willing to make the deep reform commitments in the core areas of discussion (as seems to be the case), then it is also incumbent on the U.S. to accept these offers and move forward. For if the U.S. doesn’t, the EU nevertheless will in the context of its on-going bilateral trade and Comprehensive Agreement on Investment negotiations with China. And that will leave the U.S. further on the outside-looking-in and forced to swallow non-preferential terms for many of its agricultural and industrial goods exports as well as foreign direct investment (FDI) flows to the Chinese market.
The entry of Italy, following the entry of Greece and Portugal, into the Belt and Road Initiative (BRI) means that China now has a firm Mediterranean beachhead in the EU. China’s influence is no longer restricted to the EU’s central and eastern European periphery – it is firmly now felt within the EU. This will naturally toughen the EU’s resolve to portray a united front on the community-style undertakings (free and fair market-based competition; respect for labor and human rights; environmental protections, etc.) that China must respect in order to become a full-fledged European partner. But as is often the case with the EU, the Union is only as strong as its weakest link or links. The EU’s economic performance over the past decade has been dismal, and it is not a coincidence that these three EU Mediterranean countries (Greece, Portugal, Italy) have recorded some of the EU’s worst or crisis-borne performances during this period. If the EU cannot adequately take care of its flock, and more specifically, if it cannot be an engine for prosperity, then countries both at its core and periphery will do the needful to take care of their own economic destinies. And if an external partner, such as China, is willing to oblige, individual countries will reach out regardless of what the EU’s high-minded values and principles might be. There is no high principle in the EU, after all, that can deny a country from pursuing its development and growth aspirations.
At the end of the day however, the Belt and Road Initiative will live or die in Italy – and Europe – on the basis of its own merits – or lack therefor. If it is confirmed to be a self-regarding endeavor that offers only a hard-to-digest, pre-set menu with Chinese characteristics, it will find few takers in this part of the world where prejudices about China – and Asia – already run high. On the other hand, if BRI can gradually customize itself into becoming a local European initiative (with Chinese characteristics), then Italy’s entry into BRI could well bear shades of resemblance to the UK’s decision to join the AIIB in early-2015 (which broke the dike of reluctance on the part of Western countries and led to a deluge of European countries joining the Bank thereafter).
No, with a high degree of confidence it can be said that the EU will not be softening its posture on its core demands (fair and reciprocal economic ties, including elimination of coerced technology transfers; respect from the EU’s community-based standards) – this in spite of the breakout of amity and huge deals during President Xi’s swing through the continent.
Europe’s – particularly Germany’s – advanced manufacturing prowess is one of its crown jewels; equally, the community-style rules on industrial subsidies, competition and transparency and community-based policies on labor and environment are fundamental to the integrity of the common market. Cede both away and Europe will have no defenses against future Chinese economic and political penetration. On the former particularly, given that the advanced technologies, and processes, are controlled at the national level (and not at the EU level), the scope and incentive-structure to protect them in-country and demand fair and reciprocal treatment in the course of their two-way sharing, therefore, is that much greater. And this is evident in how Germany and other core EU countries are endeavoring to rebalance China’s acquisitory appetite in Europe, by way of acquisition-denials and allocation of state-backed funds to purchase vulnerable corporate stakes (and thus deny them to Chinese entities).
It is also important to bear in mind that the essence of the EU’s recently-released Strategy Paper vis-a-vis China in mid-March was not so much a call to confront China as much as a call to itself to up-its-own-game. Up-its-own-game in terms of have member states make necessary changes to their national legislation and practices on screening foreign investment as per the EU’s recent regulation in this regard. Up-its-own-game in terms of thinking through how gaps in EU law should be filled in terms of appropriately dealing with the distortive effects of foreign state ownership and state-financing. Up-its-own-game in making unified demands to prise open China’s closed procurement market, etc. The EU’s goal is to establish EU-wide unified benchmarks first and then use them as levers to condition and elicit more accountable economic behavior from China.
But the goal never was, or is, to decouple the immense two-way economic relationship. To the contrary, the goal is to reform, open-up and elevate Chinese policies and practices to OECD levels, so that China-EU ties can flourish on an altogether-more fairer platform. Again, going back to the EU’s Strategy Paper, it is crucially important to note that it references China variously as a cooperation partner, a negotiating partner, an economic competitor, and a systemic rival. And insofar as systemic rival is concerned, that is not primarily because of China’s growing footprint on the continent; rather, it is because China is supposedly promoting “alternate models of governance.” Yes, while BRI might fall in this category, so also does the Asia Infrastructure Investment Bank (AIIB) and the New Development Bank (BRICS Bank), which have wider emerging markets sponsorship. So “alternate models of governance” is hardly just a unilateral Chinese venture. And so one must be cautious and not read too much into the “systemic rival” tag. It is this mis-reading that has tended to create artificial expectations of what the EU was or was not planning to do vis-à-vis China.
Bottom line: the good optics of the President Xi visit notwithstanding, the EU is not about to go weak-kneed on China. Rather, the intent is to engender internal cohesion among member states so that the Union as a whole can thereafter parley that considerable heft to persuade – and, if need be, compel – China to re-frame this critical bilateral relationship on a mutually fairer and more reciprocal basis. Such a relationship is ultimately in the best interests of both parties.
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